The present invention relates generally to a method for assessing real estate investments, and more particularly, to a rule-based decision process which formulates an investment strategy in terms of short term debt, long term debt, short term equity, and/or long term equity for a variety of property types and geographic markets.
There is a need for a consistent approach to assessing real estate markets that identifies areas of opportunity and, conversely, of caution. Often, market evaluations have been conducted on a deal-by-deal basis, and business decisions made this way can be the result of a tactical, rather than a strategic approach to investment analysis. Moreover, within any investment decision making process, is not uncommon for reasonable minds to differ on what factors contribute to the formulation of a successful investment strategy. For example, it is recognized that many believe that investment performance is attributed primarily to the broader market, i.e., the quality of investment decision primarily reflects the quality of the underlying market. Others may hold a different view. Such controversy during the investment strategy formulation process can be polarizing and differing opinions about the underlying investment market can lengthen the timing of the process and add complexity.
Thus, there is a need to reach consensus in advance of an investment deal transaction. Such preliminary consensus needs to be reached by having in place, a standard framework of decision rules and method of applying those decision rules that is agreed upon, in advance, by all parties proceeding through the investment decision process. The framework would be used to analyze the condition and expected trend of primary markets and property types. The steps of a process within the framework need to include the identification of regional and national trends and the systematic application of the pre-determined decision rules to the trends and associated demographic data, so that informed choices about where to focus marketing/sales effort can be made.
The method of the present invention is a two-phase process, in which the first phase achieves a visual analytical representation of the condition of each of a selected territory""s major markets, showing market direction and volatility. This view is determined on the basis of commercially available market research data which has been adjusted by the investing entity in light of actual local experience in the market. The second phase deals with what implications that performance has on four possible alternative investment types, namely, short term debt, long term debt, short term equity, and/or long term equity. The second phase enables the investing entity to formulate an investment strategy for various investment types for each property type in a respective market area. As a final step, consideration is given to how the existing investment position of the entity might further adjust the component elements of the investment strategy.
Commercially available market research data can be generated by sources internal to a given business enterprise, or accessed from commercial market research and forecasting firms. One such commercial research firm having a national reputation is Property and Portfolio Research, Inc. (PPR), a Boston, Mass. based research firm, which offers research and forecast data supportive of a quantitative approach to real estate investment and application of modern financial theory. PPR is an econometrics real estate group that predicts performance in 240 markets (60 cities and four property types) across the United States. The econometric model employed by PPR is a sophisticated analytical tool, which generates projections of changes in supply/demand/vacancy rate, resulting changes in NOI/capical value, and derived market return, which is equivalent to investor""s rate of return (IRR), defined as current yield plus capital value change. Other commercial marketing research and forecasting firms are also available and would also cooperate with the present invention.
In the preferred embodiment, four property types, including multifamily, office, retail and warehouse, are identified. Each property type, being located in a specific geographic real estate market, forms a market/property pair. Each market/property pair is ranked into a nine-product risk/reward matrix on the basis of the application of a set of decision rules which address various aspects of performance: return (high/medium/low), trend (up/flat/down), and risk (high/medium/low volatility). The ranked results are graphically displayed for subsequent analysis.
In the second phase of the process, a set of decision rules which determine whether, and to what extent, to pursue short term debt, long term debt, short term equity, and/or long term equity for a given market/property pair are formulated and each market/property pair graphically portrayed in the first phase is ranked into a simplified four-product matrix on the basis of the application of the set of decision rules. This is accomplished by a systematic application of a set of rules to the contents of each xe2x80x9cboxxe2x80x9d of the nine-product matrix. The result is again graphically portrayed so that the investing entity can easily formulate an actionable real estate investment strategy expressed in terms of investment types (namely, short term debt, long term debt, short term equity, and/or long term equity), for each market/property pair.